Spending Without Taxation: FILP and the Politics of Public Finance in Japan by Gene Park

Author:Gene Park [Park, Gene]
Language: eng
Format: epub
Tags: Public Policy, National, Political Science, American Government, Economic Policy
ISBN: 9780804777667
Google: sWJm8ccwWK8C
Goodreads: 12498395
Publisher: Stanford University Press
Published: 2011-03-24T00:00:00+00:00

From the 1950s through the 1970s, the TFBF rate was significantly below market rates, providing MOF with a cheap source of capital that it passed on to the FILP Agencies—see Figure 6.11. While the cabinet set the interest rate, there was an interest rate floor. As market rates headed lower, the mechanism for providing low-cost finance to the FILP system was threatened. MOF wanted to eliminate the interest rate floor, but it feared that doing so would undermine the justification for MOF control funds in the first place: providing safe, guaranteed minimum returns.

MOF’s opportunity to abolish the interest rate floor arose during negotiations with the MPT over a separate issue—tax treatment of deposit interest on small savings accounts. Deposit interest was exempted on small savings accounts (up to 3 million yen), including private bank and postal savings accounts. To avoid paying taxes, many Japanese opened multiple accounts. MOF wanted to eliminate the tax exemption for both types of accounts. MPT countered by demanding the right to self-manage part of the postal savings funds. Seizing this opportunity, MOF then offered to allow partial self-management but only in exchange for a reform of the TFBF interest rate regime, that is, eliminating the interest rate floor.46 The final compromise was that MPT was allowed limited self-management in exchange for a reform of the TFBF interest rate mechanism. MPT largely won over the tax issue. The tax exemption was maintained, although the MPT agreed to create a system to prevent savers from opening multiple accounts. In the end, even this modest plan was abandoned.

The result of this compromise had little effect in slowing down the growth of funds. Ironically, what started out as a plan to abolish the interest tax exemption actually resulted in the postal savings system having even more of an advantage over banks because the tax exemption was ended for private bank accounts but kept for postal savings accounts, although they were later abolished. During the 1990s, as the trust in private banks eroded with the growing financial crisis, the share of household savings deposited into postal savings also grew. The growth of postal savings more than offset the funds that would be lost to MPT self-management. Moreover, the government agreed to use a significant share of the self-managed postal savings funds to purchase national and local government bonds, purchases that would otherwise have been made via FILP. This status quo lasted until 2001, when postal savings were severed from the TFBF and thus the FILP system. MPT finally gained full control over the investment of postal savings, but until that time the postal savings pumped more and more funds into the FILP system.

Unlike postal savings, shrinking pensions was not an option because pension contributions are not voluntary deposits. Pension reserves are based on set pension contributions, which can be adjusted only if accompanied by other changes. Lowering pension contributions, for instance, would have to be matched by lower pension payouts or greater funding from taxes, neither of which was considered or, even if they had been, would have been politically feasible at the time.

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